Equity(or sometimes, capital) refers to the residual interest of the owners in the assets of a company after all liabilities are settled. In other words, equity is equal to assets minus liabilities, hence also called "net assets".
Equity = Assets - Liabilities
The term used for equity depends upon the form of business organization.
Stockholders' equity represents the portion of total assets that is left to the stockholders of a corporation after all of its liabilities are paid.
Stockholders' equity (SHE) has 3 major components: Capital Stock, Retained Earnings, and Treasury Stock.
Capital Stock or Share Capital represents contributions from stockholders gathered through the issuance of stocks. Retained Earnings or Accumulated Profits represents company earnings from the time it started minus dividends distributed, and after considering other adjustments. Treasury Stocks are shares issued by the company and were later re-acquired. The cost of treasury stocks is deducted from stockholders' equity.
Another component is known as Reserves. If a corporation has reserves, it is normally presented after Capital Stock and before Retained Earnings in the balance sheet. Reserves include unrealized gains and losses, appropriations, and additional paid-in capital.
SHE = Capital Stock + Reserves + Retained Earnings - Treasury Stock
Here is a list of stockholders' equity accounts.
The Retained Earnings account represents the accumulated earnings of the business from the time it first started. It is also known as Accumulated Profits. The amount presented in the balance sheet at the end of the year is computed using this formula: Retained Earnings at the beginning of the year (after adjustments, if any) plus net income, minus appropriations made for specific purposes, and minus dividends declared during the year.
Treasury stocks are shares of the corporation that have been issued and then were reacquired but not cancelled. In the balance sheet, the cost of treasury stock is shown as a deduction to Stockholders' Equity.
Stockholder's equity pertains to the net assets of a stock corporation It comprises share capital, reserves, and retained earnings.
Share capital refers to contributions by investors, in the form of common and preferred shares. Reserves include share premiums, unrealized gains, and appropriations. While retained earnings refer to accumulated profits which are unappropriated. Treasury shares reduce stockholder's equity.
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